Freelance business structure: sole trader, LLC, S corp, or company?

What a business structure actually changes

A business structure is the legal form your freelance work takes. It decides four things, and it helps to keep them apart:

1. Who is liable. As a sole proprietor or sole trader, you and the business are the same person, so business debts are your debts. An LLC or company is a separate legal person, so in most cases its debts stay with it. ^{[7] [8]}
2. How profit is taxed. Either the profit lands on your personal return, or the entity pays its own tax and you pay personal tax on what you take out.
3. How you get paid. A sole trader simply keeps the profit. A company owner takes salary, dividends, or loans, each with its own rules.
4. How much admin you carry. Separate accounts, annual filings, payroll, and registers all take time or fees.

Two things a structure does not do: it doesn't protect you from your own professional mistakes (a negligence claim can follow you personally, which is what insurance and a liability cap in your freelance contract clauses are for), and it doesn't make you any less of a freelancer in a client's eyes. Clients care far more about your invoices, contract, and delivery than about the suffix after your name.

Decision rules: when to stay simple and when to switch

Use these rules before reading the country detail. They hold in all four countries.

If you're still getting your first clients, the practical start guide to freelancing matters more right now than any entity paperwork.

United States: sole proprietorship, LLC, or S corp election

In the US you start as a sole proprietor automatically when you work for yourself without forming an entity. You report profit on Schedule C and pay self-employment tax on it. The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. For 2026, the Social Security part applies to the first $184,500 of combined wages and net self-employment earnings, and the Medicare part has no cap. You generally owe it once net self-employment earnings reach $400. ^[5]

A single-member LLC is a state-law entity. For federal income tax it is disregarded by default, which means you still report on Schedule C and owe self-employment tax "in the same manner as a sole proprietorship." What changes is mainly legal: the LLC generally separates business debts and lawsuits from your personal assets. ^{[1] [7]} Each state sets its own formation and annual fees and filing rules, so check your state's business filing office for the current amounts. ^[7]

An S corporation is a tax election, not a separate kind of company. An eligible LLC or corporation files Form 2553, and an LLC that does so doesn't also need Form 8832. To apply from the start of a tax year, file no more than 2 months and 15 days after that year begins, or at any time during the year before. ^[3] The S corporation files Form 1120-S, and profit flows to your personal return. ^[2] The catch: if you work in the business, the IRS expects you to be paid reasonable compensation as wages, with payroll taxes, before you take other distributions. ^[4] Some states don't treat S corporations the same way the IRS does. ^[7]

EIN: An employer identification number is free from the IRS, and you never need to pay a third party for one. ^[6] A single-member LLC with no employees and no excise tax filings can often use the owner's Social Security number for federal tax, but it needs its own EIN once it has employees, and it may need one to open a bank account. A corporation, including one taxed as an S corporation, needs an EIN. ^{[1] [6]} A sole proprietor with no employees can usually work with their SSN, though some get an EIN so they can give it to clients instead.

Whatever the structure, US freelancers still pay estimated tax during the year. The US federal tax deadlines guide for 2026 and 2027 covers the dates.

United Kingdom: sole trader or limited company

A sole trader runs the business as themselves and is "personally responsible for all of the debts of the business." You must register for Self Assessment if you earn more than £1,000 from self-employment in a tax year. ^[9] For the 2025 to 2026 tax year, the deadline to tell HMRC was 5 October 2026. ^[10]

For the 2026 to 2027 tax year (6 April 2026 to 5 April 2027), sole trader profit is taxed through Income Tax: a £12,570 Personal Allowance, then 20% up to £50,270, 40% up to £125,140, and 45% above (Scotland has different bands). ^[15] Class 4 National Insurance is 6% on profits between £12,570 and £50,270 and 2% above. If your profits are £7,105 or more, Class 2 is treated as paid, so you don't pay it. ^[16]

A limited company is legally separate from you, and owners are responsible for its debts only up to what they invested. ^[8] You register it with Companies House. Online registration costs £100 and is usually done within 24 hours, and you're usually set up for Corporation Tax at the same time. ^[11] Since 18 November 2025, new directors must verify their identity with Companies House before they act, and existing directors verify during a 12-month transition when they file their next confirmation statement. ^[19]

For the financial year starting 1 April 2026, Corporation Tax is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between (standard fraction 3/200). ^[12] It's due 9 months and 1 day after the end of the accounting period. ^[18]

Dividends. Directors usually take a mix of salary and dividends. A dividend can only be paid from available profits, after Corporation Tax, and needs a board decision and a dividend voucher, even if you're the only director. ^[14] For 2026 to 2027 the dividend allowance is £500, and dividend tax rates above it are 10.75% (basic), 35.75% (higher), and 39.35% (additional). ^[13] Any salary needs PAYE payroll, and money you take beyond salary and dividends becomes a director's loan with its own tax rules. ^[14]

VAT works the same way under both structures: you must register once taxable turnover for the last 12 months goes over £90,000. ^[17] If your UK filing routine is changing, the Making Tax Digital checkpoint for 2026 to 2027 explains which sole traders are affected. Limited company contractors should also understand off-payroll working (IR35) rules before assuming a company changes their tax position.

Canada: sole proprietorship or incorporation

A sole proprietor reports business income on their personal T1 return, calculated on Form T2125. ^[20] You don't need a business number (BN) just to exist. You get one when you register for a CRA program account such as GST/HST, and you can get it during that same registration. ^[22]

GST/HST: you're a small supplier, and don't have to register, while your taxable revenue stays at or under $30,000. Once you go over $30,000 in a single calendar quarter, or over four consecutive calendar quarters, you must register and start charging GST/HST, generally registering within 29 days. ^[21]

A corporation can be formed federally through Corporations Canada or with your province or territory. A federal corporation still registers in each province where it does business. Federal incorporation, and incorporation in several provinces, assigns a BN and corporation income tax account automatically. ^[23] The corporation files its own T2 return. For a Canadian-controlled private corporation claiming the small business deduction, the federal net tax rate is 9%, compared with 15% after the general reduction, and provinces add their own lower and higher rates. ^[24]

The low rate is the main draw, but it only helps on profit you leave in the corporation. Money you pay yourself as salary or dividends is taxed again personally. There's also a trap for contractors with one main client: if you'd be an employee of that client without your corporation, the CRA can treat it as a personal services business, which loses the small business deduction and the general reduction and pays an additional 5% tax. ^[25]

Australia: sole trader or company

A sole trader is "responsible for all decisions and losses," so personal assets are at risk if things go wrong. You use your individual tax file number, report business income on your individual tax return, and pay tax at individual rates. Sole traders are entitled to an Australian business number (ABN), which you also need before you can register for GST. ^{[26] [27] [28]}

A company is a separate legal entity with its own tax return. It costs more to set up and carries more reporting and legal obligations. ^[27] You register it with ASIC, and every director needs a director identification number before being appointed. ^[30] For 2025 to 2026, the company tax rate is 25% for base rate entities (aggregated turnover under $50 million and no more than 80% passive income) and 30% for other companies. ^[29]

GST: you must register within 21 days once your GST turnover reaches $75,000, and you need an ABN first. ^[28] As in Canada, a company doesn't shelter income that comes mainly from your own personal effort. Under the personal services income (PSI) rules, income from one main client can be taxed as yours unless you pass the results test or another personal services business test. ^[31]

Worked examples (hypothetical)

US: $100,000 net profit in 2026, sole proprietor vs S corp

Maya is a designer with $100,000 of net profit in 2026 and no other wages.

• As a sole proprietor or default LLC: self-employment tax applies to 92.35% of net profit. $100,000 × 92.35% = $92,350. $92,350 × 15.3% = $14,129.55.
• With an S corp election and a $55,000 salary: employer and employee Social Security and Medicare on the salary total 15.3%. $55,000 × 15.3% = $8,415. The remaining profit comes out as distributions without payroll tax.
• Gross difference: $14,129.55 − $8,415 = $5,714.55 a year, before paying for payroll software, the Form 1120-S, state fees, and any state taxes on S corporations.

The saving only holds if $55,000 is a reasonable salary for Maya's work. If the IRS decides it should be higher, the gap shrinks. At $50,000 of profit, the same logic gives a much smaller saving that fixed costs can wipe out. That's why the election is a question for a steady, profitable year, not for month one.

UK: £60,000 profit in 2026 to 2027, sole trader vs company

Tom is a developer in England with £60,000 of profit and no other income.

• Sole trader Income Tax: £60,000 − £12,570 = £47,430 taxable. £37,700 × 20% = £7,540, plus £9,730 × 40% = £3,892, so £11,432.
• Sole trader Class 4 National Insurance: £37,700 × 6% = £2,262, plus £9,730 × 2% = £194.60, so £2,456.60. Total tax: £13,888.60.
• Company Corporation Tax: £60,000 × 25% = £15,000, less marginal relief of 3/200 × (£250,000 − £60,000) = £2,850, so £12,150. That leaves £47,850 to distribute.
• All of it as dividends, no salary: the first £12,570 sits in the Personal Allowance, the next £500 is covered by the dividend allowance, and £34,780 is taxed at 10.75% = £3,738.85. Total tax: £12,150 + £3,738.85 = £15,888.85.

In this simplified case, taking every pound out of the company costs about £2,000 more than staying a sole trader, before accountancy fees. A real plan usually mixes a small salary with dividends and leaves some profit in the company, which can change the answer. The point is that a company is not automatically cheaper, and the result depends on how much you need to take out.

Whichever structure you pick, setting money aside every time you're paid matters more than the structure. The freelance tax set-aside calculator gives you a working percentage.

When to talk to an accountant

Book a session with an accountant or tax adviser in your country before you:

• file a US S corporation election, or set your own salary as an owner-employee
• form a UK limited company because a client or agency asked you to
• incorporate in Canada or set up a company in Australia while most of your income comes from one client
• move an existing business, with its equipment, contracts, or debts, into a new entity
• work across borders, for example living in one country with clients in another

Bring your last 12 months of profit, what you need to live on, your main clients, and your liability risks. A good adviser can then compare the options with your real numbers instead of rules of thumb. The freelance money and tax hub has the bookkeeping habits that make that conversation quick.

Setup checklist for any structure

• Open a separate business bank account and keep business money in it.
• Get the tax registrations you need: EIN, Self Assessment, BN, or ABN.
• Track the GST, HST, or VAT threshold monthly so you register on time.
• Put contracts in the name of whoever is actually doing business, you or the entity.
• Buy professional indemnity or liability insurance if a mistake could be costly.
• Review the structure once a year, when your profit picture is clear.

Common mistakes

1. Forming an entity before you have clients. Fees and filings start right away. Profit doesn't.
2. Expecting an LLC to cut US taxes. By default it doesn't. The tax change comes only with an election. ^[1]
3. Treating company money as yours. Mixing accounts weakens the legal separation you formed the company for, and in the UK, taking money that isn't salary or dividends creates a director's loan. ^[14]
4. Paying too little salary from an S corp. The IRS can treat distributions as wages when your own work earns the income. ^[4]
5. Incorporating to dodge employee status. Canada's personal services business rules and Australia's PSI rules exist for exactly this. ^{[25] [31]}
6. Paying for an EIN. It's free from the IRS. ^[6]

FAQ

Sources

Primary sources referenced above (reviewed November 2026)

1. IRS: Single member limited liability companies
2. IRS: S corporations
3. IRS: Instructions for Form 2553
4. IRS: S corporation compensation and medical insurance issues
5. IRS: Self-employment tax (Social Security and Medicare taxes)
6. IRS: Get an employer identification number
7. SBA: Choose a business structure
8. GOV.UK: Business legal structures
9. GOV.UK: Set up as a sole trader
10. GOV.UK: Register for Self Assessment if you're self-employed
11. GOV.UK: Register your company (Companies House)
12. GOV.UK: Rates and allowances, Corporation Tax
13. GOV.UK: Tax on dividends
14. GOV.UK: Taking money out of a limited company
15. GOV.UK: Income Tax rates and Personal Allowances
16. GOV.UK: Self-employed National Insurance rates
17. GOV.UK: VAT registration, when to register
18. GOV.UK: Pay your Corporation Tax bill
19. GOV.UK: Companies House identity verification for directors
20. CRA: Sole proprietorships and partnerships
21. CRA: When to register for and start charging the GST/HST
22. CRA: When you need a business number
23. Canada.ca: Choosing federal or provincial/territorial incorporation
24. CRA: Corporation tax rates
25. CRA: What is a personal services business
26. business.gov.au: Sole trader
27. business.gov.au: Tax differences between a sole trader and a company
28. ATO: Registering for GST
29. ATO: Company tax rates 2025–26
30. ASIC: Director identification numbers
31. ATO: Self-assessing as a personal services business

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